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Transition to Net Zero with the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices)

Bringing ESG Considerations to Equal-Weight Indices

FAQ: S&P 500 Twitter Sentiment Index Series

TalkingPoints: Measuring Social Media's Market Impact with the S&P 500 Twitter Sentiment Index Series

InsuranceTalks: A Robust Rotation Strategy Designed to Reflect Equity Market Dynamics

Transition to Net Zero with the S&P PACT™ Indices (S&P Paris-Aligned & Climate Transition Indices)

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Ben Leale-Green

Senior Analyst, Research & Design, ESG Indices

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Barbara Velado

Senior Analyst, Research & Design ESG Indices

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Mona Naqvi

Global Head of ESG Capital Markets Strategy, S&P Global

Backed by evidence from the UN Intergovernmental Panel on Climate Change (IPCC), ambition has grown to limit global temperature rise to 1.5°C since pre-industrial levels, reaching net zero by 2050.  Currently, 70% of global CO2 emissions are covered by net zero targets (IEA, 2021).

To date, climate-conscious investors have largely focused on reducing relative portfolio carbon exposure; however, a combination of new forward-looking datasets and index innovation is emerging.  Investors now have the choice to align with a scenario that may mitigate the most catastrophic impacts.  The European Union (EU) has defined minimum standards for the EU Climate-Transition Benchmarks (CTB) and EU Paris-aligned Benchmarks (PAB), both of which are absolutely 1.5°C and 2050 net zero compatible. Our S&P PACT Indices offer a sophisticated, but accessible, solution for investment product providers to incorporate these standards and further climate objectives, which will support investors to:

  1. Implement the objectives of the Paris Agreement and align investments with a 1.5°C trajectory toward achieving net zero emissions by 2050;
  2. Adopt a strategy intended to meet the minimum standards for EU CTBs and EU PABs and recommendations from the Task Force on Climate-related Financial Disclosures (TCFD)—accounting for the physical risks, transition risks, and opportunities arising from climate change; and
  3. Address other climate objectives in an efficient manner, while staying as close to the underlying index as possible with broad, diversified exposure.

    This paper underscores how the S&P PACT Indices could help investment product providers transition to a 1.5°C world and achieve other climate objectives, utilizing an accessible index construction.

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    Bringing ESG Considerations to Equal-Weight Indices

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    Ben Leale-Green

    Senior Analyst, Research & Design, ESG Indices

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    Barbara Velado

    Senior Analyst, Research & Design ESG Indices

    INTRODUCTION

    Equal-weight indices can have many benefits, notably long-term outperformance—largely driven by exposures to small size and value, along with their associated risk premia—as well as reduced concentration in the largest names.  However, in accessing compensated factors and reducing concentration, the S&P 500® Equal Weight Index could elicit some undesirable ESG consequences.

    With many investors looking to integrate ESG considerations into their portfolios, we ask whether it is possible to gain the benefits of equal weighting while incorporating ESG criteria.  This raises three sub-questions.

    • What ESG benefits can be gained relative to the S&P 500 Equal Weight Index?
    • Can the factor exposures associated with equal weighting be gained within an ESG framework?
    • Can we reduce concentration in a few names, while excluding companies that are undesirable from an ESG standpoint?

    Over the back-tested history, the S&P 500 Equal Weight ESG Leaders Select Index reduced exposure to many undesirable business activities and displayed a range of ESG improvements (see Exhibit 1), while having similar factor exposures and reduced concentration relative to cap weighting.  The result: a comparable pattern of returns between the S&P 500 Equal Weight Index and the S&P 500 Equal Weight ESG Leaders Select Index, while adopting a best-in-class ESG framework.

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    FAQ: S&P 500 Twitter Sentiment Index Series

    1. What is the S&P 500 Twitter Sentiment Index Series? The S&P 500 Twitter Sentiment Index Series screens the S&P 500 through the use of sentiment scores derived from Tweets containing $cashtags that reference the equity symbols of S&P 500 index constituents. These Tweets are screened and scored via machine learning and natural language processing (NLP) to calculate a daily score for each stock in the S&P 500 and select the top constituents to include in each of the S&P 500 Twitter Sentiment Indices at monthly rebalance. For more information about the S&P 500 Twitter Sentiment Indices, please see the index methodology:
      https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-twitter-sentiment-indices.pdf.

    2. Why was the S&P 500 Twitter Sentiment Index Series created? The S&P 500 Twitter Sentiment Index Series was created to reflect the performance of the names with the most positive sentiment within the S&P 500 over a given period of time.

    1. What specific indices are included in the S&P 500 Twitter Sentiment Index Series? As of Nov. 18, 2021, the index series consists of the following indices:

      S&P 500 Twitter Sentiment Index: This index is designed to track the performance of the 200 constituents with the most positive sentiment from the S&P 500, which are weighted on a float-adjusted market capitalization (FMC) basis, with a 10% cap at rebalance.

      S&P 500 Twitter Sentiment Select Equal Weight Index: This index is designed to track the performance of a selection of the 50 constituents with the most positive sentiment from the S&P 500, which have been equally weighted at rebalance.

      Note that in order to be considered for either index, each company must have a sufficient number of Tweets containing $cashtags that reference the equity symbol of the company over the last month (after filtering for spam has been applied) for that sentiment score to be considered robust enough for inclusion. The number of companies without sufficient Tweet volume may vary from month to month depending on market conditions. Both indices have a decay factor applied to their daily scores at rebalance in order to ensure the most recent information is given higher importance.

    2. What is Twitter’s role in the S&P 500 Twitter Sentiment Indices? S&P DJI teamed up Twitter to create this index. In addition to co-branding, Twitter supplies the data necessary to score the S&P 500 members' sentiment on a daily basis.
    3. How does the scoring of the S&P 500 constituents work? At each rebalancing, the index selects constituents from the S&P 500 universe that have the most positive sentiment over a fixed time period and have sufficient Tweet volume to be scored. Sentiment scores are derived from an analysis of a daily feed of Tweets containing $cashtags that reference the equity symbol of a company. Each stock is scored daily, and these stocks' scores are aggregated on a monthly basis, with more recent activity receiving higher weights, given that recent sentiment often has a greater impact. All of these final monthly scores are ranked in order to create the index reconstitution for the next monthly time period.

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    TalkingPoints: Measuring Social Media's Market Impact with the S&P 500 Twitter Sentiment Index Series

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    Therese Simberg

    Director, Innovation and Strategy

    Social media is a relevant aspect of community life around the world. So what happens when we measure that engagement through a financial markets lens? S&P Dow Jones Indices (S&P DJI) has launched its first indices that are designed to measure social media sentiment through the S&P 500 Twitter Sentiment Index Series. Therese Simberg, Director, Innovation and Strategy at S&P DJI, discusses the creation of the indices and what they mean in the evolution of innovative indexing, as well as the more practical uses for investors on tracking social media sentiment.

    1. What drove the creation of this new index series?
      Over the last few years, social media has evolved in that more and more people are Tweeting about stocks and financial markets. This includes the financial community, such as traders, analysts, and investors, as well as the general public who want to express their opinions.

      As the technology has improved, these views and Tweeted opinions from this online community are now able to be analyzed; as a result, it is possible to interpret and try to understand what the market is saying about a specific company by aggregating an analysis of underlying Tweets containing $cashtags, which indicate that the Tweet is concerning a particular stock. Through artificial intelligence, a particular stock's Tweets can be analyzed to see whether the overall sentiment is, on balance, positive or negative based on the collective opinion as expressed through these Tweets. This analysis lends itself well to indexing, as we now have a way of classifying stocks and creating an index that reflects the opinions of the Twitter community.

      To summarize, the S&P 500 Twitter Sentiment Indices have been created to reflect the companies in the S&P 500 that have the most positive sentiment as indicated by the Twitter community. The indices include companies with positive sentiment relative to their peers.

    2. Why are you choosing to launch these indices now?
      Social media is transforming the way information is conveyed to investors, and it contains significant and differentiated information about individual stocks, as well as broad market information. Social media is unique in that it is a place for various market opinions to be combined into one public forum, including opinions from different types of participants like professional analysts, the media, investors, and the general public.

      Even though the impact of social media in the financial market is not a new phenomenon, more recently the world has seen high-profile situations that have clearly showcased that impact. The S&P 500 Twitter Sentiment Indices aim to help investors gauge the impact of social media, albeit over a longer time period and across a more diversified set of equities than typical day trading.

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    InsuranceTalks: A Robust Rotation Strategy Designed to Reflect Equity Market Dynamics

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    Phillip Brzenk

    Head of Multi-Asset Indices

    Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

    Kun Qiu is Co-Head of Derivatives Trading and Analytics at Security Benefit where his team manages a notional fixed index annuity (FIA) derivatives portfolio of more than USD 19 billion and seeks to help develop the next generation of FIA products.

    S&P DJI: Security Benefit has been a leader in so-called custom indices in FIA products. How did that happen, and why was it important to Security Benefit to innovate in that way?

    Kun: After the Global Financial Crisis, the industry was ripe for change in terms of smarter diversification and downside protection. We stepped up our game and became a pioneer of sorts by bringing to market a broad range of underlying index options—across asset types—in our FIA product line that the industry has followed. Later in 2014, we began a strategic focus on building a premier investment team at Security Benefit. The team has been diving deeply into the existing FIA market. We keep looking for innovative index strategies driven by historically proven academic research. We are continuously pushing our technology to achieve better hedging efficiency as well, as we seek to deliver more interest potential for our customers.

    S&P DJI: What role do indices play in the information Security Benefit provides to consumers?

    Kun: At Security Benefit, our products that are based on indices (like FIAs) are sold through independent, third-party financial professionals who choose to do business with us. We don’t sell directly to consumers, and we have an indirect line of communication to them through the materials we create to explain how our products may be used. Consumers, along with their financial professionals, are better positioned to make the investment planning decisions for their individual situations.

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